Renewables will change energy revenue
I started writing during which I came up with the software analogy. I ended up scrapping what I had written for this tighter thought but I’ll retain the draft below.
The global shift to renewable energy is running software’s move from one-time sales to recurring subscriptions in reverse.
Energy currently is a subscription model. Countries dependent on energy imports need to consistently import energy from net energy exporters. This means a steady trade of outbound capital in exchange for inbound energy, like monthly purchases of a SaaS product.
The introduction of renewables shifts energy to public goods. Every country has access to solar and wind energy. So the principal limitation won’t be the natural resource itself but storage. Energies harnessed at the point of collection will be used to power homes and other national needs while excess energy will be stored in batteries, which are getting better and cheaper.
Purchases of batteries are more like one-time purchases of software (or more accurately, like one-time purchases of hardware). Once a purchase is made, a battery can do its job and last several years. Payment won’t be needed every day, week, or month. Furthermore, reliance on a limited set of providers won’t be necessary. A country can import wind turbines, solar panels, or batteries from multiple manufacturers. Imagine Ethiopia buying panels from the United States, China, Germany, India, Vietnam, Russia, and more. Lowering dependency is great for the buyer and limits leverage for the seller.
This will disadvantage China, which has invested heavily in solar, wind, and battery technology. If I had to bet on a horse, I’d bet that China will have the cheapest renewable energy products on the market. They’ll work to develop and export their renewable technology to foreign countries. They’re already doing that. But dominating the energy market in the future doesn’t seem like it’ll be as lucrative or geopolitically advantageous as it was for countries like Saudi Arabia and Russia in the past.
In economics, there is a classification of goods determined by excludability and rivalrousness. In other words, to what degree can people be prevented from consuming a good or to what degree does the consumption of one good preclude someone else from it? From those two factors we can create a matrix of four results:
- Private goods: Excludable and rival
- Public goods: Non-excludable and non-rival
- Common resources: Non-excludable but rival
- Club goods: Excludable but non-rival
This concept is used in microeconomics to interpret individual consumerism. But let me try to make my point if we imagine nations as individuals.
Energy primarily comes today from de-facto “private resources”. This is what energy sources like coal, natural gas, and oil are. Nations who own the land possess an asset owned entirely by them (excludable) and only consumable once (rival). They can choose to consume it or sell it to other countries just like an individual can use a good or sell it on Facebook Marketplace to another buyer.
As fate has it, these governments have a path towards financial prosperity. Jordanians liked to lament to me how they weren’t as blessed as gulf Arabs because they didn’t have “black gold”. Of course, this is pure luck and it’s worth noting the citizens themselves aren’t necessarily prosperous, only the governments. Jordanians may be jealous of Saudis but even they may not trade lives with Venezuelans.
That brings me to Russia. Putin points to Russia’s GDP as an measure of his performance but overlay that with the price of oil and there’s a strong correlation.
- Russia increased its GDP from $260 billion to $1.66 trillion from 2000 - 2008, an 6.38x increase in eight years. A barrel of oil sold for $34 in 2000 and jumped to $196 in 2008, an increase of 5.76x during the same period.
- From 2008 - 2009, the Global Financial Crisis occured, cratering both oil and Russia’s GDP.
- Oil maintains a level above $100 from 2010 - 2014, in which Russia’s GDP goes from $1.42 trillion to $2.29 trillion.
- Russia invades Crimea, faces Western sanctions, and faces a downturn in oil prices (down to $45 per barrel) crushes Russia’s GDP back down to $1.28 trillion in 2016.
- Oil has yet to hold the $100 level for any meaningful period of time. Meanwhile, Russia’s economy grows trepidatiously for several years.
The reason why Russia is able to survive its current onslaught of Ukraine is attributable to its vast reserve of resources and a list of willing buyers. Bitter strategists refer to Russia as a global gas station for a reason. The importance of energy as private goods can’t be overstated.
That takes me to China, almost unquestionably the leader in renewable energy development. They’re making the largest push to deploy wind and solar energy. The country installed 217 gigawatts of solar energy last year alone, a 55% increase from 2022 and more than the installed capacity of the rest of the world combined. Latest estimates has the country hitting peak emissions this year, six years ahead of schedule.
The state has deployed billions of dollars on investments and subsidies designed to drive production costs down. It has positioned itself as key exporter of the technology for other countries. Solar is already the cheapest form of energy in a majority of countries.
But China selling renewable energy-adjacent products like solar panels or batteries won’t be as lucrative as selling oil. It also won’t have geopolitcal leverage like Russia or Saudi Arabia because countries won’t need constant purchases or can diversify their wind turbines, solar panels, or batteries to other global manufacturers. Energy will finally move from a private good asset owned by a country towards a public good harnessable by every country.
On the whole, this seems like a large net benefit. Not only does the world move away from fossil fuels, but hopefully no single country will be able to wield energy reliance as a stick over others.